Turnover Alchemy: Converting Employee Losses into Gains

Departing staffers can become a source of new networks and competitive intelligence.

Marty Beard, CEO of LiveOps Inc., a leading cloud-based contact company in Silicon Valley, recently got some bad news: One of his best project managers was leaving for another company. Beard was upset. He worried that LiveOps would suffer from the loss of talent and knowledge, and he considered doing everything in his capacity—including legal maneuvers—to prevent the move. But Beard soon realized that the manager’s departure wasn’t a total loss. He had gone to work for one of LiveOps’s biggest customers, Salesforce.com, and his move had actually become a benefit. Beard now reports that, in a way, the ex-employee is a critical source of insights about an important client.

These days, people are an organization’s most valuable asset. Given the work that it takes to recruit, identify, and hire strong talent, companies want to retain their employees at all costs. But in the increasingly mobile labor market, companies should actually view departing employees as continuing assets and employee turnover as a source of long-term strength.

Academic research is starting to quantify the benefits of this turnover. A team of researchers from the Wharton School of the University of Pennsylvania and the University of Maryland studied the effects of “outbound mobility.” The researchers examined 154 semiconductor firms over 15 years, systematically exploring linkages between the firms on both sides of an employee move and any patterns in the way the firms cited patents. They found that after an employee changed jobs, both the “sending” and the “receiving” firms became more likely to cite the other firm’s patents. That is, companies that lost employees actually gained knowledge.

Why? The researchers theorized that the employees left behind gained access to the knowledge generated at their ex-colleague’s new workplace. They became more aware of that company and its ideas, leading to a kind of cross-pollination. The effect was more pronounced when there was a large geographic distance between the two companies, suggesting that the departing employee made his or her old employer more aware of concepts and intellectual capital that it likely wouldn’t have encountered otherwise.

Other researchers have found similar advantages from employee turnover. A study published in the Journal of Economic Geography, for example, looked at inventors of mobile technology. When an inventor left a particular region, the “knowledge flows” to that region were 50 percent higher than if the inventor had never worked there. (The study looked at geographic transfers, but the logic applies to companies as well.) In many cases, the mechanism behind such flows of knowledge was social capital—personal relationships that stayed strong despite the inventor’s departure.

In fact, the idea of social capital informs many of the benefits of departing employees. Part of that social capital stays with the prior employer, introducing a connection between the two firms that might not have existed in the past. When employees at two firms know each other, collaboration, and even competition, can become more effective. Ex-employees make their new firm more aware of the work done by their former firm, often building on those ideas and increasing the chances that the new firm’s patents will be licensed. The sending company also strengthens its networks and industry positioning in professional associations, technical committees, and lobbying efforts, growing its industry footprint and making it easier to navigate the market. Perhaps most important, the reputation of companies becomes more relevant when potential hires know someone who used to work at a given company.

Despite these benefits, the common reaction among companies experiencing turnover is to resort to defense and retaliation. They write noncompete clauses into contracts, and they enforce such clauses, increasingly through litigation. According to the Wall Street Journal, employer lawsuits against former employees regarding noncompete clauses have risen 60 percent over the past decade.

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